The Hedgehog (Hh) signaling pathway has critical roles in embryonic development, adult stem cell maintenance and in many cancers. In vertebrates, Hh signaling is initiated at the primary cilium, from where the signal is relayed to the cytoplasm and then nucleus, to ultimately control expression of specific target genes, mediated by the Gli transcription factors. In the absence of stimulation, Gli proteins are kept off by at least three inhibitory mechanisms: 1) direct binding of Suppressor of Fused (SuFu); 2) partial degradation to repressor forms and 3) inhibition by protein kinase A (PKA). When cells receive an Hh signal, these inhibitions are overcome, allowing Gli activation. In spite of the importance of Hh signaling, we still do not understand many of the critical mechanisms involved in inhibiting and in activating Gli proteins, in the resting and stimulated states of the Hh pathway, respectively. We discovered that Hh stimulation recruits SuFu-Gli complexes to primary cilia and causes their dissociation, resulting in Gli activation; we found that this process is antagonized by PKA. This provided a novel mechanism for activation of Gli proteins and for the inhibitory effect of PKA. We also discovered that inhibition of the proteasome potently blocks Gli activity, suggesting that Gli turnover and transcriptional activation are intimately coupled. We propose to use a combination of biochemistry and cell biology, to elucidate the mechanism of the following critical events in vertebrate Hh signaling: A) How does Hh signaling activate Gli and inhibit SuFu? B) What is the function of SuFu-Gli recruitment to cilia in Hh signaling, and how does PKA block SuFu-Gli recruitment to cilia? C) How does inhibition of the proteasome block transcriptional activation by Gli proteins and how is the partial proteolysis of Gli proteins regulated? These studies are important for the following reasons: 1) They will elucidate basic mechanisms that control the critical Gli proteins, thus advancing our understanding of Hh signaling; 2) They will identify novel targets for Hh inhibition in cancer; and 3) Our finding that proteasome inhibitors potently block Hh signaling could have immediate therapeutic implications in cancer, particularly since the proteasome inhibitor bortezomib is an FDA-approved drug for the treatment of multiple myeloma.